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Wednesday, 21 February 2018

(Reuters) - U.S. stocks were higher on Wednesday, with technology shares and Amazon driving gains ahead of minutes of the Federal Reserve’s most recent policy meeting.

The Fed left rates unchanged at the January meeting, but investors will look for its opinion on inflation and interest rates, especially after strong economic data raised concerns of an overheating economy and triggered the recent selloff.

“While the minutes may not generate quite the same response, traders will likely monitor what they say very closely for signs that policy makers are now leaning more towards three-to-four rate hikes this year, rather than two or three,” said Craig Erlam, senior market analyst at online forex broker Oanda.

Investors also took stock of the latest developments in the Broadcom-Qualcomm takeover saga.

Broadcom Corp lowered its takeover offer for chipmaker Qualcomm to account for the latter’s increased offer for NXP Semiconductors NV.Qualcomm shares fell more than 1.5 percent.

LendingClub’s shares fell more than 4 percent after the online lender posted a wider quarterly loss.

By 9:36 a.m. ET, the Dow Jones Industrial Average had gained 0.33 percent to trade at 25,046.48. McDonald's rose 1.5 percent and was the biggest driver of the blue-chip index.

The Nasdaq Composite rose 0.56 percent to 7,274.62 and the S&P 500 was up 0.41 percent at 2,727.5.

Nine of the 11 major S&P sectors were higher, led by a 0.8 percent gain in consumer discretionary shares. Amazon was up 1.3 percent and Netflix 1.7 percent.

The S&P technology index rose 0.5 percent. The top gainers were Apple, Alphabet and Facebook. However, the energy index fell 0.4 percent as oil prices eased due to a rebound in dollar.

The benchmark 10-year U.S. Treasury bond yields are still near four-year highs at 2.8859.

LONDON (Reuters) - Sterling edged down against the dollar on Wednesday, as traders held their breath ahead of British average earnings data, which if robust will reinforce bets on a Bank of England rate hike in May.

Market have moved to price in around a 70 percent chance of a rate rise in May following a more hawkish than expected BoE policy statement earlier in the month. But economists say any tightening is contingent on solid wage growth, as well as Britain securing a post-Brexit transition deal.

Labour market data due at 0930 GMT is expected to show earnings growing at 2.5 percent.

The pound jumped on Tuesday after a media report that the European Parliament would call for giving Britain “privileged” single market access.

Growing hopes that Britain and the European Union can agree a transition deal, and then terms for the UK that allow it to remain as close as possible to the trading bloc, have helped support sterling this year.

But the British currency was back below $1.40 on Wednesday, trading down 0.2 percent by 0840 at $1.3965.

The pound was flat at 88.20 pence per euro.

“We wouldn’t be surprised if investors were genuinely confused over the short-term direction of travel for sterling given the myriad of different narratives and factors driving the currency right now,” wrote ING currency strategist Viraj Patel in a note to clients.

“Today’s eventful UK calendar is only set to ramp up the short-term noise levels. The latest jobs report will be closely watched following the BoE’s data and Brexit-contingent hawkish signal.”

LONDON (Reuters) - Sterling fell against the dollar on Tuesday as the U.S. currency rebounded from recent lows, while traders said they were looking to crucial British earnings data due later this week that could help cement bets the central bank will hike rates in May.

Bank of England Governor Mark Carney earlier this month said interest rates needed to rise a bit faster and more than previously expected, and the market now prices in a roughly 80 percent chance of a May hike.

Analysts said the May hike was largely priced into the pound, which is up 3.4 percent against the dollar this year, and for sterling to rally further there would need to be more clarity over Britain’s departure from the European Union, or expectations of more rate hikes.

“We would need to see a significant negative [earnings data] miss to see the market reprice the chances of a May hike,” Morten Helt, a strategist at Danske Bank in Copenhagan, said, referring to data due on Wednesday.

The data is seen as crucial because the BoE has said it signalled that it needs to see rises in wage pressures before it starts to raise rates.

Carney is due to speak to a British parliamentary committee on Tuesday, but analysts said they expected him to stick to the line given earlier in the month as the market had already moved to price in a hike in May.

Helt said he thought the market was underpricing the chances of further rate hikes over the next two years, but it would take time for those expectations to adjust and to be reflected in sterling.

The pound fell 0.3 percent against the dollar to trade at $1.3953 at 0925 GMT. Sterling in January hit its highest level, at $1.4346, since the vote to leave the EU in June, 2016.

Against the euro, the pound was up marginally at 88.495 pence per euro.

Traders will be looking to an EU leaders meeting next month for progress on Britain securing itself a transition deal for when it leaves the EU.

“Shifting opinion polls regarding the merits of Brexit keep a carrot in front of the noses of sterling bulls, because there’s no doubt that any genuine hope of a soft or non-existent Brexit would be good for the currency,” Societe Generale said.

Tuesday, 20 February 2018

LONDON (Reuters) - The dollar continued its rebound from three-year lows on Tuesday, having recovered 1.5 percent since Friday on the view that the U.S. currency was due a correction after a brutal sell-off in recent weeks.

The greenback has decoupled from U.S. Treasury yields since the start of the year, skidding to its lowest levels since late 2014 against a basket of major currencies despite 10-year Treasuries approaching 3 percent for the first time in four years.

That correlation breakdown has puzzled many investors. Economists have explained it by saying that the reasons for the rise in yields have not so much been driven by expectations for higher interest rates and stronger growth, but worries about runaway inflation that have caused a selloff in both the dollar and Treasuries.

But on Tuesday, the dollar rose just over half a percent against its index to 89.569, as 10-year U.S yields climbed back up to 2.92 percent.

“The dollar finally seems to be getting some support from higher US bond yields,” said ACLS Global strategist Marshall Gittler, adding that he saw further strength in the dollar against the yen in particular.

Any positive impetus from rising U.S. interest rates has been offset by a barrage of bearish factors in recent months.

Initially, the view that other central banks would catch up with the Federal Reserve in tightening policy this year was cited as a reason for the dollar’s underperformance.

Then came comments from U.S. Treasury Secretary Steven Mnuchin who stoked concerns the United States could pursue a weaker dollar policy as its trade deficit rose to highest level in almost a decade.

Mounting worries about the U.S. budget deficit, which is projected to balloon to more than $1 trillion in 2019 amid a government spending splurge and large corporate tax cuts, have also undermined the greenback.

Economists say U.S. President Donald Trump’s tax cuts and spending plans could backfire by overheating an already strong economy, causing an unwanted pick-up in inflation.

Against the yen, the dollar climbed half a percent to 107.09 yen, having bounced back from a 15-month low of 105.545 set on Friday.

Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore, said there seemed to be some short-covering in the dollar in the wake of its recent fall.

“We’ve got a lot of Fed speakers...this week. I think that could be a reason why we’re seeing some of the short dollar positions pared back,” Innes said.

He added, however, that the dollar could come under pressure if this week’s U.S. government bond auctions were to show sluggish investor demand for U.S. debt.

The euro eased 0.4 percent to $1.2360, backing down from Friday’s three-year high of $1.2556.

LONDON (Reuters) - A six-day rebound in world stocks began to splutter on Tuesday, as bond market borrowing costs regained traction and the dollar kicked firmly away from a three-year low.

Europe’s main bourses saw steady start as lower domestic currencies helped their cause but weakness across Asia where Tokyo saw a 1 percent drop meant MSCI’s 47-country world share index was 0.2 percent in the red.

The dollar meanwhile continued its rebound from three-year lows, having recovered 1.5 percent since Friday on the view that the U.S. currency was due a correction after a brutal sell-off in recent weeks.

U.S. Treasury 10-year yields - the benchmark for global borrowing costs - were also on the up again and approaching 3 percent for the first time in four years.

“I‘m not sure whether this (early February sell-off) was the dip to buy, there will probably be a relapse and then another relapse, before maybe around mid-summer stocks make another run up.”

European bond yields pushed up too, with traders also working through the options of who could succeed Mario Draghi as European Central Bank chief next year after Spain’s economy minister was nominated for the bank’s number two job.

One of other recent catalysts for the recent market disturbances, the VIX volatility index - Wall Street’s “fear gauge” - was moving higher again as well, although at just over 20 percent in early European trading it was still well below early February’s peak of above 50.

The dollar’s rebound also meant most emerging market currencies were under pressure.

South Africa’s rand and Turkey’s lira both gave back more of their recent gains, while growing concerns about an alleged fraud at India’s second-largest state-run bank sent the rupee skidding to a near three-month low.

“Punjab National Bank will need to provide for at least a substantial portion of the exposure. As a result, the bank’s profitability will likely come under pressure,” rating agency Moody’s said as it put it on a downgrade warning.

Against the yen, the dollar climbed half a percent to 107.09 yen, having bounced back from a 15-month low of 105.545 set on Friday. The euro eased 0.4 percent to $1.2360, backing down from Friday’s three-year high of $1.2556.

In commodity markets, Oil prices were mixed, with reduced flows from Canada pushing up U.S. crude while Brent sagged $65.45 per barrel on the back of weaker Asian stocks and the dollar’s bounce.

Spot gold slipped 0.4 percent to 1,341.06 an ounce, also corseted by the dollar’s bounce, while industrial metals including copper drifted lower for a second day in a thinner-than-usual trading due to new year holidays in China.

Monday, 19 February 2018

NEW YORK (Reuters) - The dollar rose and stocks around the globe rallied for a sixth straight session on Friday to post their best week in more than two years, but a U.S. indictment over alleged Russian meddling in the 2016 presidential election cooled gains on Wall Street.

The 37-page indictment of a Russian internet agency filed by Special Counsel Robert Mueller described a conspiracy with the aim of supporting Donald Trump and sowing discord in the U.S. political system.

Wall Street turned south on news of the indictment but soon rebounded as the fundamental story has not changed, said Ben Phillips, chief investment officer of EventShares, referring to a strong corporate earnings outlook and robust economy.

Analysts continue to underestimate the pace of global growth, which has led more companies to meet or beat analysts’ earnings expectations than in any quarter in 20 years, according to calculations earlier this week by Credit Suisse.

Fourth-quarter results for European companies in the STOXX 600 index are expected to increase 14.6 percent from a year ago, while the blended earnings growth estimate for the S&P 500 is 15 percent, Thomson Reuters I/B/E/S data show.

Since a market rout was sparked two weeks ago on fears of rising inflation and its impact on interest rates, a tug of war has ensued between investors seeking safety in bonds or betting a nine-year bull market in stocks is still alive.

Investors also are concerned about how the Federal Reserve will deal with still-low inflation without killing an economy and inflate asset bubbles, said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.

“That’s a very difficult spot. The market recognises that challenge and is wondering how the Fed will address it,” he said.

But investors are getting comfortable with the idea that growth is sufficient enough to withstand the expected rate increases the Fed has projected this year as well as signs of rising inflation, Arone said.

MSCI’s index of stock markets across the globe rose 0.26 percent to gain 4.3 percent for the week, the best weekly performance since December 2011.

Stocks were poised for their best week in six years until news of the special counsel indictment pared some gains.

On Wall Street, the Dow Jones Industrial Average .DJI closed up 19.01 points, or 0.08 percent, to 25,219.38. The S&P 500 gained 1.02 points, or 0.04 percent, to 2,732.22 and the Nasdaq Composite dropped 16.97 points, or 0.23 percent, to 7,239.47.

Investors are trying to determine whether the market is in an overdue correction or the beginning of something worse, Arone said.

“It looks like this week they’re comfortable about uncertainty and the risks that are associated with it, and stocks are moving higher based on fundamentals,” he said.

U.S. Treasury prices rose as investors bought back bonds after a sell-off earlier in the week as investor jitters over rising inflation raised the possibility the Federal Reserve may hike interest rates at a faster pace than expected this year.

Borrowing costs across the euro area fell, though the prospect of higher inflation and a move toward tighter monetary policy from major central banks weighed on sentiment across world bond markets.

Short-dated bond yields in Germany, the euro zone’s benchmark bond issuer, have risen by about 7 basis points this week and are set for their biggest weekly rise in eight weeks.

Benchmark 10-year U.S. Treasury notes rose 6/32 in price to push their yield down to 2.8713 percent.

The dollar rose on the day but remained on track to post its biggest weekly loss in nine months as negative sentiment offset any support the greenback had from higher Treasury yields.

The dollar index, tracking a basket of major currencies, rose 0.58 percent, with the euro EUR= down 0.81 percent to $1.2404. The Japanese yen JPY= weakened 0.18 percent versus the greenback at 106.33 per dollar.

Oil prices rose, as the rebound in the global equities market and the dollar’s recent weakness supported their recovery from last week’s slide.

U.S. West Texas Intermediate crude for March delivery rose 34 cents to settle at $61.68 a barrel. Brent settled up 51 cents at $64.84.

U.S. April gold futures settled up $0.9, or 0.1 percent, at $1,356.20 per ounce.

Friday, 16 February 2018

MAGNITOGORSK, Russia (Reuters) - Unknown hackers stole 339.5 million rubles ($6 million) in an attack on the SWIFT international payments messaging system in Russia last year, the Russian central bank said on Friday.

The disclosure, buried at the bottom of a central bank report on digital thefts at Russian banks, is the latest in a string of attempted and successful cyber heists using fraudulent wire-transfer requests.

The central bank said it had been sent information about ”one successful attack on the work place of a SWIFT system operator.

“The volume of unsanctioned operations as a result of this attack amounted to 339.5 million rubles,” the bank said.

The central bank declined to provide further details.

A spokeswoman for SWIFT, whose messaging system is used to transfer trillions of dollars each day, said the company does not comment on specific entities.

”When a case of potential fraud is reported to us, we offer our assistance to the affected user to help secure its environment,” said the spokeswoman, Natasha de Teran.

A central bank spokesman quoted Artem Sychev, deputy head of the regulator’s security department, as saying the hackers had withdrawn the money and this was “a common scheme, when they take control of a computer.”

Brussels-based SWIFT said late last year digital heists were becoming increasingly prominent as hackers use more sophisticated tools and techniques to launch new attacks.

In December, hackers tried to steal 55 million rubles from Russian state bank Globex using the SWIFT system, and digital thieves made off with $81 million from Bangladesh Bank in February 2016.

SWIFT has declined to disclose the number of attacks or identify any victims, but details on some cases have become public, including attacks on Taiwan’s Far Eastern International Bank and Nepal’s NIC Asia Bank.

TOKYO (Reuters) - The dollar slipped to a three-year low against a basket of currencies on Friday, headed for its biggest weekly loss in two years, as bearish factors offset support the U.S. currency could take from rising Treasury yields.

Extending overnight losses, the dollar’s index against a group of six major currencies lost about 0.4 percent to 88.253 , the lowest since December 2014. The index was on track to lose more than 2 percent on the week in its largest decline since February 2016.

The U.S. currency has been weighed down by a variety of factors this year, including concerns that Washington might pursue a weak dollar strategy and the perceived erosion of its yield advantage as other countries start to scale back easy monetary policy.

Traders also suspect that confidence in the dollar has been eroded by mounting worries over the U.S. budget deficit which is projected to balloon to near $1 trillion in 2019 amid a government spending splurge and large corporate tax cuts.

“There really are no signs of the dollar recovering anytime soon. Participants are bracing for dollar/yen to head towards 105 and the euro to climb past $1.25,” said Shin Kadota, senior strategist at Barclays in Tokyo.

“It’s difficult for the market to see the dollar rebounding, especially as decent U.S. fundamentals seem to be providing no support for the currency,” Kadota said.

Indeed, the dollar failed to gain momentum after data on Wednesday showed U.S. inflation was stronger than expected in January, sending Treasury yields to four-year highs, as investors bet the Federal Reserve could increase interest rates as many as four times this year.

The euro was up 0.4 percent at $1.2553 after reaching a three-year top of $1.2556 and poised to gain 2.4 percent this week.

The Swiss franc reached 0.9190 franc per dollar, its strongest since June 2015.

KURODA REAPPOINTED BOJ GOVERNOR
The dollar was down 0.4 percent at 105.685 yen after slipping to 105.545, its lowest in 15 months. It was on track for a weekly loss of 2.9 percent.

The reappointment of Haruhiko Kuroda as Bank of Japan governor and the nomination of BOJ executive director Masayoshi Amamiya and Waseda University professor Masazumi Wakatabe as deputy governors had little impact on the yen, although the proposed leadership trio were seen certain to keep the central bank on an ultra-loose policy path.

“There are no significant changes to the current BOJ regime with the governor chosen for another term, and a central banker and a reflationist academic picked as his deputies,” said Shusuke Yamada, chief Japan FX strategist at Bank of America Merrill Lynch.

“This should clear some uncertainty regarding BOJ personnel, but it unlikely to impact the currency market at a time when the dollar is broadly weaker,” Yamada said.

The pound rose 0.25 percent to $1.4134 , having gained about 2 percent on the week.

The Australian dollar added 0.25 percent to $0.7965 .

The Aussie, sensitive to shifts in risk sentiment, had slipped to near 1-1/2-month low of $0.7759 a week ago during a tumble in global equities before bouncing back.

TOKYO (Reuters) - Asian shares rose for a fifth straight day on Friday as investor confidence slowly returns after a sharp sell-off earlier in the month, while the dollar continued its descent, hitting a three-year low against a basket of major currencies.

U.S. debt yields rose near multi-year highs. Two-year note yields hit a 9 1/2-year high as bond prices fell on Federal Reserve officials’ signaling that recent volatility in U.S. stocks would not stop them raising interest rates in March.

European shares are expected to rise 0.3 to 0.4 percent at the opening, according to spread-betters.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.4 percent, though many Asian markets were closed on Friday for the Lunar New year.

Japan’s Nikkei rose 1.2 percent, with investors relieved to see the government appoint Bank of Japan Governor Haruhiko Kuroda for another term, suggesting the central bank will be in no rush to dial back its massive stimulus program.

Measured by the MSCI’s broadest gauge of the world’s stocks covering 47 markets, global shares have now reclaimed more than half of the 10.7 percent plunge from a record intraday high on Jan. 29 to a four-month intraday low a week ago.

Investors have been reassured by a fall in the Wall Street Vix index, the “fear gauge” that measures the one-month implied volatility of U.S. stocks.

The index dropped below 20 for the first time since its spike to 2 1/2-year high of 50.3 last week, a jump that caused massive losses among investors who bet equity markets would be stable on a combination of solid economic growth and moderate inflation.

The Vix futures fell back to more normal patterns, from the past several days of so-called backwardation, in which the front-month contract becomes the most expensive.

The return of a more usual curve suggested that the loss-cutting and position unwinding of “volatility short” strategies had run its course for now, easing investors’ nerves.

“I’ve said markets will be unstable until February, and that February will offer a good buying opportunity,” said Eiji Kinouchi, chief technical analyst at Daiwa Securities, noting that U.S investors were likely to book profits in January to take advantage of lower tax on capital gains.

The selling appears to have run its course and the fall in volatilities, both implied and actual, is likely to prompt investors to return to stocks, he said.

The U.S. dollar, on the other hand, slipped below its January low against a basket of major currencies to reach its lowest since late 2014.

The dollar index fell to as low as 88.37, and was on course to lose over 2 percent for the week, its biggest such loss in two years.

There is no strong consensus yet on what is driving the dollar’s persistent weakness, especially in light of rising yields. Some say it simply reflects a return of risk appetite and a shift to higher-yielding currencies, including many emerging market ones.

But others cite concerns that Washington might pursue a weak dollar strategy as well as talk that foreign central banks may be reallocating their reserves out of the dollar.

There are also worries President Donald Trump’s tax cuts and fiscal spending could stoke inflation and erode the value of the dollar.

“His protectionist policies could also fan inflation. Markets appear to have calmed down for now but fundamentally it is different from last year,” said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management.

“You could say that right now, rather than stocks rising around the world, it is the dollar falling against almost everything,” he added.

The euro rose to $1.2556, its highest since December 2014. Having risen 2.37 percent so far this week, it could post its biggest weekly gain in nine months.

The dollar dropped to 105.545 yen, its lowest level since November 2016 and down 2.8 percent for the week, which would be the biggest in a year and a half.

The South African rand hit a three-year high of 11.6025 to the dollar on Thursday on hopes the resignation of President Jacob Zuma had paved the way for new leaders to speed up economic growth.

The dollar’s fall came even as U.S. bond yields remained near a multi-year high.

The 10-year U.S. Treasuries yield hit a four-year peak of 2.944 percent on Thursday and last stood at 2.910 percent.

Shorter-dated yields also rose as investors grew convinced that the correction in stock prices in recent weeks would not prevent the Fed from raising interest rates in March and twice more this year.

Cleveland Fed president Loretta Mester said on Tuesday the recent stock market sell-off and jump in volatility will not damage the economy’s overall strong prospects. Mester is being considered a leading candidate for the Fed’s Vice Chair.

The two-year yield rose to as high as 2.213 percent, its highest since Sept 2008, on Thursday and last stood at 2.210 percent.

Oil prices maintained this week’s gains, with U.S crude futures trading at $61.65 per barrel, up 4.1 percent so far this week.

Elsewhere, virtual currency bitcoin recovered the $10,000 mark for the first time in two weeks, gaining more than 70 percent from its near three-month low of $5,920.7, before easing back a tad to $9,925.

LONDON (Reuters) - Foreign exchange trading volumes have risen sharply since the start of this year, new data showed on Thursday, as investors ramped up bets on a weaker dollar and uncertainty about the end of the era of cheap money stoked volatility.

Foreign exchange volatility has slumped in recent years as record levels of liquidity provided by central banks calmed markets and left investors with fewer ways to wring a profit from trading currencies.

But the continued depreciation of the dollar this year, accelerated by the U.S. Treasury Secretary’s comments welcoming a weaker dollar, as well as signs that central banks will begin dialling back their stimulus, have fired up currency markets.

Electronic trading platforms are also reporting a sharp increase in fixed income trading volumes.

CLS, a major settler of trades in the FX market, said the average daily traded volume submitted to it had risen to $1.805 trillion in January, up 24 percent from a year earlier and up 15.6 percent from December.

“This year we’ve observed a much more substantial increase as FX volatility has risen. For the last six months of 2017, we saw a broader trend of year-on-year increases...but in January the market has really taken off,” said David Puth, CLS’s CEO.

CLS said trading had accelerated further in early February, possibly as the equity sell-off starting in late January increased volatility even more.

In the first four days of last week, Feb. 5 to Feb. 8, volumes rose by a further 14 percent over January’s numbers to $2.054 trillion, CLS said.

Currency market swings, however, have been far more measured than in stocks, with volatility still below long-term average levels.

Thomson Reuters said this week that FX trading volumes on its platforms had hit a record high in January, the first month following the introduction of sweeping European regulations, known as MiFID II or Markets in Financial Instruments Directive II.

Average daily volumes topped $432 billion in January compared with an average of more than $407 billion, the company said.

The new European rules, designed to increase market transparency, have also driven electronic fixed income trading volumes.

MarketAxess, one of the bigger platforms, said this month that average daily trading volumes hit a record $7.3 billion in January, up 22 percent from a year earlier.

RISING VOL
The uptick in volatility will be welcomed by investment bank trading desks, which can make more money when prices swing wider but have faced years of calmer markets.

“January was active because it was the start of the next phase of the dollar’s depreciation, and then you had the ECB,” JP Morgan’s Head of Currencies and Emerging Markets Trading in EMEA, Stephen Jefferies, told Reuters, referring to minutes from the European Central Bank that raised speculation of monetary tightening in the euro zone.

Still, Jefferies noted that volatility in the world’s most traded currency pair, the euro/dollar, remains below its long-term average even after the recent rise.

When stocks tumbled earlier this month, Jefferies said currencies did not move as much as many had expected, suggesting “positions might not have been as big as you thought”.

But with central banks expected to accelerate unwinding of their balance sheets as inflation expectations rise, currency volatility is set to rise.

“This shift in central bank thinking has some serious implications for currencies as well,” said Neil Jones, London-based head of hedge fund currency sales at Mizuho bank.

Thursday, 15 February 2018

LONDON (Reuters) - Sterling rose against the dollar on Thursday, cementing gains on the back of a broadly weakened dollar, with traders eyeing earnings data next week to give the pound fresh momentum.

After a strong start to the year on the back of growing expectations that the Bank of England will raise rates faster than previously thought, and optimism Britain can secure itself more favourable terms from the European Union when it leaves next year, sterling has stumbled in recent weeks.

Renewed concern about whether it can agree a transition deal with the EU have overshadowed more hawkish comments from the BoE about the need for rate rises sooner and to a little bit more of an extent that it flagged last year.

A BoE survey published on Wednesday that showed British workers in line for their biggest pay rises since 2008 could also fuel policymaker concerns over inflationary pressures.

Markets are pricing in around a 70 percent chance of a rate hike as soon as May.

But it was the falling dollar that gave sterling its lift on Thursday. The greenback tumbled as worries over twin deficits in the United States mounted amid a government spending splurge and large corporate tax cuts.

The pound gained 0.5 percent to trade at $1.4072 and its best level since Feb. 5.

Against the euro, the pound was up 0.2 percent to 88.79 pence per euro.

“This is largely a dollar story today,” said Jane Foley, London-based FX strategist at Rabobank.

Foley said we would need “to see very strong earnings data” next week to push sterling, in the absence of further dollar weakness, much higher and back towards the $1.4346 it hit in January, its highest level since the vote to leave the European Union in June 2016.

Analysts at ING said the period leading up to the late March EU leaders’ summit would be noisy for sterling but the pound’s “relative resilience is telling of a different Brexit trading environment to what we saw in 2017”.

TOKYO (Reuters) - Asian stocks rose on Thursday after Wall Street brushed aside strong U.S. inflation data and surged, in a move that also saw the dollar pinned to two-week lows even as Treasury yields jumped in anticipation of more rapid U.S. interest rate hikes.

Australian stocks climbed 1.15 percent and South Korea’s KOSPI added 1.1 percent. Japan’s Nikkei advanced 1.5 percent following three successive days of losses that took it to a four-month low the previous day.

U.S. shares surged on Wednesday, with the Dow up 1 percent and the S&P 500 climbing 1.34 percent, as investors shrugged off the stronger-than-expected inflation data and snapped up shares of Facebook, Amazon.com and Apple.

S&P mini futures rose 0.4 percent on Thursday.

The VIX index - Wall Street’s “fear gauge” and a measure of market volatility - has declined below 20, less than half the 50-point peak touched last week.

U.S. consumer prices rose slightly more than forecast in January as Americans paid more for gasoline, rental accommodation and healthcare, further raising inflation concerns and worries that the Federal Reserve may hike interest rates more than earlier expected.

That drove U.S. Treasury yields on most maturities higher, with those on benchmark 10-year notes hitting a four-year high of 2.928 percent.

Other data on Wednesday showed U.S. retail sales fell 0.3 percent in January to mark the biggest decline in 11 months. This was well below forecasts for an increase of 0.2 percent, suggesting slower growth could accompany higher inflation.

“The combination of stellar U.S. CPI and weak retail sales data leaves investors in a precarious situation,” wrote strategists at CitiFX.

“Strong price data presents hawkish risks for the Fed’s dots at the March meeting. Three dots have been the baseline and now four seems a greater risk. Meanwhile, retail sales results have caused a downgrade of GDP estimates across the Street.”

The dollar index against a basket of currencies slipped 0.3 percent to 88.879 after losing more than 0.6 percent overnight despite the strong inflation number.

The recovery in broader risk sentiment was seen weighing on the dollar, which had gained during the market turmoil earlier in the month.

The U.S. currency has been weighed down by a variety of factors this year, including concerns that Washington might pursue a weak dollar strategy and the perceived erosion of its yield advantage as other countries start to scale back their easier monetary policy. Concerns about the growing U.S. fiscal deficit have also intensified.

The dollar stretched overnight losses against the Japanese yen to touch a 15-month low of 106.300, having declined more than 2 percent so far this week, causing the Nikkei to underperform its global peers.

“Japanese stocks could act as drag to their regional counterparts if the stronger yen hampers its performance. In that respect the strong yen could be seen as a factor preventing the stabilisation in global markets,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.

The euro extended gains to reach a 10-day high of $1.2473 after surging 0.8 percent the previous day.

The South African rand traded at 11.73 per dollar and near a 2-1/2-year high of 11.66 set overnight after the country’s ruling African National Congress (ANC) said it would proceed with a vote to remove President Jacob Zuma from office.

The Australian dollar added to the previous day’s rally and reached a 10-day top of $0.7946.

In commodities, Brent crude futures were up 1.1 percent at $65.06 per barrel after prices surged the previous day as U.S. crude stocks rose less than expected and Saudi Energy Minister Khalid al-Falih said major oil producers would prefer tighter markets than end supply cuts too early.

Crude also benefited from the dollar’s weakness. Oil tends to move inversely to the dollar, and has also of late been trading in tandem with stocks.

Spot gold rose to a 10-day top of $7,195 per ounce and on track for a weekly gain of more than 6 percent, supported by the sagging dollar and as the metal drew demand as a hedge against inflation following the rise in U.S. inflation.

SINGAPORE (Reuters) - The dollar extended its losses against the yen and hit a new 15-month low on Thursday, with market participants bracing for further near-term weakness in the U.S. currency.

The dollar dropped below Wednesday’s low of 106.725 yen and fell as far as 106.30 yen, its weakest level since November 2016. That marked a drop of 3.8 percent from its early February peak near 110.50 yen.

The U.S. currency later pared some of its losses and was last down 0.4 percent at 106.56 yen.

”There’s nothing specific, it’s just a continuation of dollar selling that we’ve seen everywhere overnight, said Tareck Horchani, head of sales trading in Asia Pacific for Saxo Markets in Singapore.

Traders and analysts said the next support level for the dollar was around 105 yen.

Some market participants said speculative buying of the yen initially helped drag the dollar lower, with stop-loss dollar selling later adding to the fall against the Japanese currency.

On Wednesday, the dollar gained a lift from a stronger-than-expected rise in U.S. consumer prices in January that bolstered bets the Federal Reserve might raise interest rates four times in 2018.

But that gain for the dollar proved short-lived, and the greenback ended up retreating broadly against major peers despite the change in expectations for U.S. interest rates.

In Thursday’s Asian trade, the euro edged up 0.1 percent to $1.2459, after gaining 0.8 percent on Wednesday. Sterling was steady at $1.4004, after also having risen 0.8 percent the previous day.

In the wake of the dollar’s sharp drop against the yen over the past couple of weeks, there was increased focus on whether Japanese exporters and Japanese investors would step up moves to hedge their exposure to the U.S. currency.

“As a defensive mechanism I think they will probably be more inclined to sell dollars here to protect downside risk for further U.S. dollar weakness,” said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore.

“Obviously I think we’re going to have the verbal lashing from Japan’s currency officials. But I still think we’re not close to the point of overt intervention and I think the market’s going to take us down to the 105s,” Innes said.

Japanese Finance Minister Taro Aso said on Thursday that he doesn’t see current yen moves as being strong or weak enough to warrant intervention, adding that there was no plan now to respond to FX moves.

(Reuters) - U.S. stocks fell on Wednesday, after three days of gains, as strong inflation data fanned fears of faster interest rates hikes, while an unexpected fall in January retail sales raised concerns about economic growth.

The inflation data sent benchmark U.S. 10-year Treasury yields to a session high of 2.8820 percent, making bonds more attractive than stocks.

The Labor Department said its Consumer Price Index increased 0.5 percent last month as households paid more for gasoline, rental accommodation and healthcare. Economists polled by Reuters had forecast an increase of 0.3 percent.

Excluding the volatile food and energy components, the CPI shot up 0.3 percent, the largest increase since January 2017. However, the year-on-year rise in the so-called core CPI was unchanged at 1.8 percent in January.

Separately, a report showed U.S. retail sales decreased 0.3 percent last month, the biggest fall in nearly a year and a surprise drop compared with economists’ expectations of a 0.2 percent rise.

“In some ways you would say this is the worst possible number for U.S. equities: extremely weak U.S. retail sales and a higher CPI. I think there is less to the numbers than meets the eye, however,” Steven Englander, head of research and strategy at Rafiki Capital in New York, said.

“It does play into the fears that we are getting into a different inflation regime than we were before. The last ten years was below target inflation and now the expectations are adjusting upwards, which means the Fed is not as friendly.”

By 9:34 a.m. ET, the Dow Jones Industrial Average was down 0.29 percent, at 24,568.22. The S&P 500 fell 0.31 percent to 2,654.59 and the Nasdaq Composite slipped 0.29 percent to 6,993.05.

U.S stock futures fell more than 1 percent after the CPI data was released at 8:30 a.m. ET. They were higher by about 0.5 percent ahead of the report.

However, the CBOE Volatility index .VIX, which measures near-term volatility in the stock market, initially spiked after the data. The VIX is currently near sessions lows at 21.06, and well below the 50-point mark it hit last week.

Financial stocks were the only gainers among the 11 major S&P indexes. Banks benefit from higher interest rates.

Among stocks, Fossil shares soared 70 percent as short sellers rushed to cover their positions, a day after the watchmaker posted strong holiday quarter sales.

Chipotle jumped about 15 percent after it hired Brian Niccol from Taco Bell as its next chief executive, an move that analysts called a potentially “transformational moment.”

Declining issues outnumbered advancers on the NYSE by 2,062 to 526. On the Nasdaq, 1,727 issues fell and 649 advanced.

Wednesday, 14 February 2018

TOKYO (Reuters) - The dollar slid to a 15-month low against the yen on Wednesday, as investors remained on edge ahead of key U.S. inflation numbers later in the day, underscoring fragile risk sentiment following the recent shakeout in equity markets.

The U.S. currency was 0.7 percent lower at 107.050 yen, its weakest since November 2016, with a drop in Japanese shares increasing demand for the yen which is often sought in times of market turmoil.

The dollar had enjoyed a brief respite against its Japanese peer overnight as U.S. shares managed to gain for the third successive session on Tuesday following last week’s sharp downturn. But it began to wobble again as Japan’s Nikkei surrendered early gains and fell on Wednesday.

Near-term focus was on how far the dollar would slide against the yen after falling below 107.320, which was seen as a key technical level.

“Trend-following macro funds see the yen appreciating further. There are no fresh factors, but for speculators, anything that appears yen-supportive is welcome, even in hindsight,” said Yukio Ishizuki, senior forex strategist at Daiwa Securities in Tokyo.

Lingering expectations the Bank of Japan would follow the Federal Reserve and the European Central Bank in eventually normalising monetary policy have helped the yen appreciate, even though the Japanese central bank has reiterated that it intends to stick to its ultra-easy stance.

“Many trend-following players have a scenario drawn up in which the BOJ follows a monetary policy normalisation cycle,” said Koji Fukaya, president at FPG Securities in Tokyo.

“However, following such a scenario and driving the yen higher means that the BOJ would be even more determined to stick to an easy policy and prevent the currency from appreciating and shield the domestic stock market.”

Volatility in the risk asset markets have been a key driver of currencies and investors now await U.S. January inflation data due at 1330 GMT, with the indicator seen either upsetting the equity market’s fragile recovery or clearing the way for additional gains.

Wall Street shares slumped from record highs scaled late in January after Treasury yields rose to four-year highs, largely because of inflation worries.

Seasonally adjusted U.S. consumer price index data is expected to show inflation of 0.3 percent in January versus 0.1 percent in December.

The dollar’s fall against the yen comes against the currency’s broader declines against a number of peers.

The U.S. currency attracted demand during the global market tumult seen earlier this month, although it had fallen to a three-year low against a basket of currencies in January.

The dollar was weighed by factors including the prospect of the United States pursuing a weak dollar strategy and the greenback enjoying less interest rate advantage as other countries part with easy monetary policy.

The dollar index against a group of six major currencies was down 0.3 percent at 89.447 after dropping nearly 0.6 percent overnight.

The euro added to overnight gains and last traded up 0.3 percent at $1.2384.

The New Zealand dollar gained 0.75 percent to $0.7329 after a Reserve Bank of New Zealand’s quarterly survey showed business managers forecast annual inflation to average 2.11 percent over the coming two years, from 2.02 percent in the previous survey.

SYDNEY (Reuters) - Asian share markets turned mixed on Wednesday as investor nerves were strained ahead of a U.S. inflation report that could soothe, or inflame, fears of faster rate hikes globally.

Japanese demand for yen also saw the dollar break last year’s low and skid to a 15-month trough at 107.01, dragging the U.S. currency down broadly.

That in turn pressured Japan’s Nikkei which slipped as much as 1.4 percent to test four-month lows. Dealers said there was a lot of focus on the 200-day moving average at 21,031 as a break there would ring bearish alarm bells. The Nikkei was last down 0.4 percent at 21,154.17.

Other Asian markets were steadier, as were E-Minis for the S&P 500. MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.8 percent, pulled higher by South Korea and Hong Kong indices.

Moves elsewhere were tentative with investors clearly scarred by the return of volatility.

BofA Merrill Lynch’s February Fund Manager Survey found a record one-month jump in the net percentage of investors taking out protection against a sharp fall in equity markets.

Funds were rotating into cash and out of equities, reducing their stock allocation to a net 43 percent overweight, from 55 percent, the largest one-month decline in two years.

Much now rested on what the U.S. consumer price report showed for January, given it was the risk of accelerating inflation that triggered the global rout in the first place.

Headline consumer price inflation is forecast to slow to an annual 1.9 percent and core inflation to 1.7 percent, an outcome that could help calm nerves. The concern is the figures could surprise on the high side as wages did a couple of weeks ago.

“Even a slightly higher number could set the cat among the pigeons given the late cycle stimulus the Trump Administration is pumping into the U.S. economy.”

BEWARE THE TWIN DEFICITS
In currency markets, the U.S. dollar was under fire again losing 0.2 percent on a basket of currencies to 89.5.

The euro firmed to $1.2378 and away from last week’s trough at $1.2204. It was aided by expectations German GDP data later on Wednesday would show strong growth.

Analysts said investors were becoming nervous about the prospect of swelling U.S. budget and trade deficits given the passage of huge tax cuts and spending plans.

“The re-emergence of the twin deficit should send shivers down the dollar’s spine,” said Mark McCormick, North American head of FX strategy at TD Securities.

He noted the IMF had estimated that a 1 percent rise in the budget deficit led to a 0.6 percent increase in the U.S. current account deficit. That suggested the twin deficit could exceed 7 percent of GDP by the end of the decade, all of which had to be funded by offshore money.

“Those numbers do not bode well for the greenback in the medium term,” concluded McCormick.

The drop in the dollar gave a fillip to commodities, with copper firm after jumping 2.7 percent overnight.

Sterling popped higher following the release of UK inflation data, which showed that inflation unexpectedly held close to its highest level in nearly six years in January.

“The big source of fright out there in the market is higher inflation. It’s centered in the U.S., but it’s a global phenomenon,” said Jasper Lawler, head of research at London Capital Group.

“This data coming in at a slightly faster tick than we were expecting just supports that narrative that actually global inflation is on the rise and that interest rates are probably going to have to follow suit,” Lawler added.

Trading was apprehensive as concerns around higher inflation and rising bond yields have been a driver of the recent sell-off across global equity markets.

Last week the FTSE posted its biggest weekly loss since the beginning of 2016, ending the week at a 13-month low.

A firmer pound kept a lid on gains for heavyweight, international earners such as Unileve, Imperial Brands which all fell.

Gains for mining firms helped limit losses, however, with firmer metals prices driving gains in Glencore, Anglo American and Antofagasta.

Travel group TUI was a notable riser, its shares up more than 5 percent and at a record high after the company said that summer trading was very good.

“What’s really driving the shares to fresh record highs ... is likely lower debt and improved underlying profitability,” said Mike van Dulken, head of research at Accendo Markets.

A positive broker note boosted shares in engineering group Smiths Group , up around 1 percent.

Analysts at Barclays began their coverage of the stock with an “overweight” rating, saying that they have seen a positive change in cash flow at the business.

Tuesday, 13 February 2018

TOKYO (Reuters) - The dollar retreated on Tuesday as global equity markets showed some signs of stability after their recent rout, reviving risk appetite that has fuelled bets against the U.S. currency on prospects of its narrowing interest rate advantage.

Still, many market players are not convinced the worst is over, with U.S. bond yields stuck at elevated levels ahead of Wednesday’s U.S. consumer price data that could rekindle worries about inflation.

“I think markets will remain shaky until (Federal Reserve Chairman Jerome) Powell’s congressional testimony on Feb. 28. Markets will try to test him until they hear his thinking,” said a trader at a U.S. bank.

The dollar’s index against a basket of six major currencies stood at 90.1392, having fallen 0.26 percent on Monday and edging away from Thursday’s half-month high of 90.569.

The euro traded at $1.2290, bouncing off last week’s low of $1.2206, though it was still more than two cents below its 3-year high of $1.2538 hit on Jan. 25.

Buying the euro was one of the popular trades earlier this year on the view that the European Central Bank will scale back its stimulus later this year on the back of a strong recovery in the euro zone economy.

Although many market players remain bullish on the euro in the long term, the currency lacks fresh catalysts for further gains amid headwinds from uncertainties ahead of Italy’s election in early March.

In Germany, Chancellor Angela Merkel and the leader of the Social Democrats (SPD) face criticism from within their own parties over a new coalition deal that must still be approved by disgruntled SPD rank-and-file members.

The risk reversal spreads for euro/dollar options have widened in favour of euro puts, suggesting investors have grown more cautious about the chances the single currency will fall.

The British pound edged up to $1.3846 from Friday’s low of $1.3764. Despite uncertainties around Brexit, the pound has been propped up by rising expectations the Bank of England will raise interest rates to curb inflation.

The revival of risk appetite dented the yen, with the dollar changing hands at 108.71 yen, recovering from Friday’s five-month low of 108.05 yen.

Global stock markets staged a strong rebound since a brutal sell-off that began late January on worries about rising inflationary pressure.

Higher inflation could prompt the Federal Reserve to tighten its policy faster than expected. Alternatively, if the Fed doesn’t act fast enough and falls behind the curve on policy, it could end up pushing up long-term bond yields. In either scenario, traders worry that U.S. growth could be hampered.

There were some indications such fears are beginning to subside, with Wall Street shares rebounding strongly on Monday and MSCI’s all-country world index of stock performance rising 1.2 percent.

Still, market players are on guard for more volatility.

The 10-year U.S. bond yield hit a four-year high of 2.902 percent while the 30-year yield rose to 11-month high of 3.199 percent.

“Rise in long-term bond yields lifts mortgage lending costs and is likely to cool the economy,” said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.

Uchida said the dollar is likely to remain under pressure against the yen.

The South African rand slipped 0.3 percent to trade at 11.96 rand to the dollar, surrendering early gains made after reports the ruling African National Congress party executive committee had decided to “recall” or remove President Jacob Zuma as head of state.

TOKYO (Reuters) - A group of cryptocurrency traders will file a lawsuit against Coincheck Inc on Thursday over last month’s theft of $530 million (£382 million) in digital money from the Tokyo-based exchange, a lawyer representing the claimants said.

The ten traders will file the claim at the Tokyo District Court over Coincheck’s freezing of cryptocurrency withdrawals, Hiromu Mochizuki, a lawyer representing the plaintiffs, told Reuters.

The traders will request that Coincheck allows them to withdraw cryptocurrencies to “wallets” - folders used for storing digital money - outside the exchange, Mochizuki said. The group may launch a second lawsuit at the end of the month to claim for damages over the heist, he added.

Coincheck representatives did not immediately respond to phone and emailed requests for comment.

The Coincheck incident highlighted the risks in trading an asset that policymakers are struggling to regulate, and has renewed the focus on Japan’s framework for overseeing these exchanges.

The Tokyo-based exchange, which froze all withdrawals of yen and digital currencies following the theft, resumed yen-withdrawals from Tuesday, according to posts on Twitter.

Coincheck said on Friday it would allow customers to withdraw yen after confirming the integrity of its system security. It added it would keep restrictions on cryptocurrency withdrawals until it could guarantee the secure resumption of its operations.

Coincheck is set to file on Tuesday a report with regulators on the heist, the safety of its systems, and measures it will take to prevent a repeat.

(Reuters) - A scheme to manipulate Wall Street’s fear gauge, VIX, poses risk to the entire equity market and costs investors hundreds of millions of dollars a month, a law firm on behalf of an “anonymous whistleblower” told U.S. financial regulators and urged them to investigate before additional losses are suffered.

The Washington-based law firm which represents an anonymous person who claims to have held senior roles in the investment business, told the Securities and Exchange Commission and Commodity Futures Trading Commission on Monday that he discovered a market manipulation scheme that takes advantage of a widespread flaw in the Chicago Board Options Exchange (CBOE) Volatility Index (VIX).

The CBOE Volatility Index measures the cost of buying options and is the most widely followed barometer of expected near-term stock market volatility.

“The flaw allows trading firms with advanced algorithms to move the VIX up or down by simply posting quotes on S&P options and without needing to physically engage in any trading or deploying any capital,” it said in a letter.

Those bets against volatility unravelled last week as the benchmark S&P 500 and the Dow Jones Industrial Average suffered their biggest respective percentage drops since August 2011.

Investors using exchange-traded products linked to the VIX were pummelled and two banks, Credit Suisse Group and Nomura Co Ltd, said they would terminate two exchange traded notes that bet on low volatility in stock prices.

Months of extended calm in the stock market has made selling volatility a lucrative affair, with ETPs attracting about $3 billion (£2.17 billion) in investment.

When the VIX futures prices spike, these ETPs lose value, at which time the issuers of these products could liquidate the shares.

“We contend that the liquidation of the VIX ETPs last week was not due solely to flaws in the design of these products, but instead was driven largely by a rampant manipulation of the VIX index,” according to the letter from the law firm.

The letter lacks credibility as it has inaccurate statements, misconceptions and factual errors, including a fundamental misunderstanding of the relationship between the VIX Index, VIX futures and volatility exchange-traded products, CBOE said in a statement to Bloomberg.

The SEC declined to comment, while the CFTC and CBOE were not immediately available for comment.

TOKYO (Reuters) - Asian stocks pulled further away from two-month lows on Tuesday, lifted by Wall Street’s extended rebound from last week’s steep fall, but investors remained cautious ahead of U.S. inflation data later in the week.

Spreadbetters expected a higher open for European equities, forecasting 0.25 percent gains for Britain’s FTSE and 0.3 percent for Germany’s DAX and France’s CAC.

MSCI’s broadest index of Asia-Pacific shares outside Japan was up 1.1 percent after sliding to its lowest level since Dec. 11 on Friday.

Australian stocks rose 0.6 percent and South Korea’s KOSPI climbed 0.65 percent. Japan’s Nikkei started higher but lost steam to slip 0.75 percent.

The Shanghai Composite Index was 1 percent higher, buoyed by global gains and suggestions of possible Chinese government support.

An affiliate of China’s securities regulator on Monday encouraged major shareholders of domestically-listed firms to increase their holdings after last week’s global selloff mauled Chinese stocks.

Wall Street’s three major indexes rose for the second day on Monday as investors regained some confidence after U.S. equities had their biggest weekly drop in two years.

Still, caution lingered in the broader markets following the U.S.-led tumble in riskier assets last week and ahead of U.S. inflation data on Wednesday. A stronger-than-expected reading on price pressures could trigger a fresh wave of selling.

“It is hard at this stage to tell if the U.S. markets have bottomed out, considering that bets against the dollar still remain significant,” said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities in Tokyo.

“On the other hand, attempts by investors to pull money out of the emerging markets during last week’s turmoil appeared to have been unexpectedly limited, so that is an encouraging sign.”

Wednesday’s U.S. inflation data will be watched closely by jittery markets.

“The consumer prices numbers bear close watching as if it shows a strong rise, that could rattle U.S. long-term yields and impact equities negatively,” said Koji Fukaya, president of FPG Securities in Tokyo.

The 10-year Treasury note yield edged back to 2.849 percent after rising to a four-year peak of 2.902 percent on Monday.

The dollar index against a basket of six major currencies extended modest losses suffered overnight and dipped 0.25 percent to 89.987. The index edged back from a two-week high of 90.567 scaled late last week, when it had benefited as a safe haven in the wake of the global market selloff.

The greenback lost 0.3 percent to 108.285 yen, weighed by the sagging Nikkei. The euro added 0.15 percent to $1.2310.

The South African rand was little changed at 11.91 per dollar after slipping briefly following news that the country’s ruling party African National Congress had opted to sack President Jacob Zuma.

The rand had risen 2 percent over the past two days, helped by hopes that Zuma would step down, but ran into resistance as the latest news was seen potentially prolonging the political standoff.

The Australian dollar was steady at $0.7866 after rising about 0.6 percent overnight on the back of higher commodity prices and improvement in broader risk sentiment.

Copper prices also bounced further away from two-month lows as more stable global markets encouraged investors to return to commodities.

Copper on the London Metal Exchange extended an overnight rally to trade 1.4 percent higher at $6,927.00 per tonne.

Commodities were also supported by the dollar’s pullback from two-week highs. A lower greenback favors non-U.S. buyers by reducing the price of dollar-denominated commodities.

Monday, 12 February 2018

SYDNEY (Reuters) - Asian share markets found a semblance of calm on Monday as S&P futures extended their bounce, though global investors were still fretting about the risks from looming U.S. inflation data after last week’s sharp sell-off.

Both South Korea and China gained 1.2 percent, while Japan’s Nikkei was closed for a holiday.

E-Mini futures for the S&P 500 rose 0.6 percent, adding to a late bounce on Friday. European bourses were expected to open with solid gains, with futures for the London FTSE already up 1.4 percent.

Yet a relatively sharp 14-tick drop in Treasury bond futures suggested it was too early to sound an all-clear on volatility.

“A massive buildup in market leverage has been partially unwound in the blink of an eye and morphed into something far more broad-based,” said Chris Weston, chief market strategist at broker IG.

“One could argue that it is the U.S. bond market that is the driving force, and will remain so through this coming week.”

Particularly challenging will be U.S. consumer price data on Wednesday given that it was fears of faster inflation, and thus more aggressive rate rises, that triggered the global rout in the first place.

Median forecasts are for consumer price inflation to slow a little to 1.9 percent in January from a year earlier, mainly due to the base effect of a high reading in January 2017, while the core measure is seen ticking down to 1.7 percent.

A result in line with or below expectations would likely be a big relief, while anything higher could well spook investors, lift bond yields and batter stocks.

Aziz Sunderji, an economist at Barclays, suspects the inflation scare will prove to be transitory.

“Tight jobs markets will pressure wages upwards, but technology, automation, and globalisation are important – and slow moving – forces acting in the opposite direction,” Sunderji argued in a note to clients.

Paradigms don’t shift on a dime. In our view, the recent market turmoil is a bump in the road, not a wholesale change of direction.”

THE RETURN OF VOLATILITY
But what a bump it was. The benchmark S&P 500 fell 5.2 percent last week, its biggest decline since January 2016. Ninety-six S&P 500 stocks were down 20 percent or more from their one-year highs, according to Thomson Reuters data.

In Asia, Hong Kong’s high-flying shares shed almost 10 percent for the week, while Japan lost 8.1 percent and South Korea 6.4 percent.

The pivotal gauge of S&P 500 volatility, the VIX, remained relatively elevated at 29 percent.

Yields on U.S. 10-year Treasury paper touched a four-year top of 2.885 percent, moving ever further above the S&P 500’s dividend yield of 2.34 percent.

The ascent of yields had offered some support to the U.S. dollar last week, but was proving of limited help on Monday as speculators returned to short the currency.

The euro clawed back 0.5 percent to $1.2288, after losing 1.8 percent last week, while the dollar eased 0.4 percent on a basket of currencies to stand at 90.118.

The dollar was steady on the yen at 108.71, aided in part by reports that Haruhiko Kuroda would be re-appointed as head of the Bank of Japan and likely continue the country’s ultra-loose monetary policy.

Commodities pared recent losses, with gold 0.6 percent firmer at $1,323.88 an ounce and off a five-week low of $1,306.81.

Brent crude futures rallied 59 cents to $63.38 a barrel, while U.S. crude for April added 68 cents to $59.88.

Brent lost nearly 9 percent last week and U.S. crude dropped 10 percent, the steepest falls since January 2016.

LONDON (Reuters) - Britain’s pound edged up against the dollar on Monday, with a weaker U.S. currency helping sterling rebound from a three-week low reached last week after the EU’s chief Brexit negotiator warned a transition deal was far from assured.

Last week sterling suffered its biggest falls against the dollar since October, hit first of all by broad strength in the U.S. currency amid a sharp stock market sell-off and then by worries that Britain could leave the European Union in a disorderly manner, triggered by Michel Barnier’s warning.

The pound’s weekly losses came despite a surprisingly hawkish policy meeting from the Bank of England, which said interest rate rises could come sooner and more quickly than investors were expecting.

Markets moved to price in a 70 percent chance of a rate hike in May after the meeting, and sterling jumped by more than 1 percent against the dollar and euro, but its gains were shortlived.

With equity markets recovering from last week’s slide on Monday, however, the return of risk appetite encouraged investors to sell dollars and buy back into riskier currencies.

The pound rose 0.3 percent to $1.3863. It was flat against the euro at 88.54 pence.

“This [sterling’s move higher] is on the back of the broader dollar sell-off,” said London-based Michael Hewson, analyst at CMC Markets. “The pound got hit quite hard on Friday. We are getting a little bit of a rebound.”

Hewson said inflation data due on Tuesday would be important in determining sterling’s direction, and that wages numbers due next week would be even more crucial as they would help shape the market’s expectations for when and how fast the BoE would raise interest rates.

The pound has climbed more than 4 percent against the dollar over the past two months, on the back of perceived progress on talks with the EU on what a future relationship between the two will look like when Britain leaves in 2019, as well as some cautious optimism on the economy.

But it is now down around 3.5 percent since hitting an 18-month high in late January.

Derek Halpenny, head of European market research at MUFG in London, said Britain’s ability to secure a transitional arrangement with the EU would affect BoE policy and, by extension, sterling’s trajectory.

“If a transitional agreement is not reached in the coming months, the BoE would be less likely to follow through on their plans to raise rates in May, although Governor Carney did not go as far as to completely rule out a hike in that scenario,” he wrote in a note to clients.

“We still believe that securing a transition deal is the most likely outcome, although the risk of a renewed period of pound weakness would increase if the UK government drags its heels in the coming weeks and months.”

LONDON (Reuters) - The Bank of England is likely to need to raise interest rates again to tackle inflation but will not do so aggressively, the central bank’s chief economist said in a newspaper article published on Sunday.

Haldane, on a visit to northeast England, referred to the BoE’s statement after its policy meeting on Thursday that interest rates were likely to need to rise somewhat faster and to a somewhat greater extent than it had previously thought.

“We have a very strong eye on inflationary developments, and they’re currently ahead of our target,” the Newcastle Chronicle newspaper reported him as saying.

“That’s why we’ve raised rates once already and why ... we said that, on the balance of probabilities, it seems likely that some further tightening of policy might be needed over the period ahead,” he added.

The central bank raised interest rates for the first time in over a decade in November, and financial markets now see a roughly 70 percent chance of a further 25 basis point increase in May, which would take the BoE’s main rate to 0.75 percent.

Any interest rate rises over the coming year would be minor, the paper reported Haldane as saying.

“We’re in no rush, rates won’t remotely go back to levels we’ve seen in the past, but nonetheless keeping the cost of living under control is, we think, the single best and most important thing we can do to help the economy,” he was quoted as saying.

British consumer price inflation touched its highest in more than five years at 3.1 percent in November and the central bank forecasts that it will take more than three years to return to its 2 percent target if it does not raise rates.

SINGAPORE (Reuters) - The yen edged higher versus the dollar on Monday, but traded below a five-month high as a bounce in U.S. equities late last week dampened demand for traditional safe haven currencies.

The dollar eased 0.1 percent to 108.70 yen, but remained above Friday’s trough of 108.05 yen, its lowest level since Sept. 11. The dollar last week fell nearly 1.3 percent against the yen.

The yen tends to attract demand in times of market stress as the currency is backed by Japan’s current account surplus, which offers it more resilience than currencies of deficit-running countries.

The U.S. S&P 500 gained 1.5 percent on Friday, ending a wild week with a burst of buying, but still recorded the worst week in two years. Despite the bounce, investors were bracing for more volatile trading days ahead.

During Asian trading hours on Monday, S&P 500 e-mini futures edged higher and were up 0.5 percent as of 0406 GMT.

Reports late last week that the Japanese government had decided to nominate Haruhiko Kuroda for a rare second term as Bank of Japan governor when his current one expires in April, signalling the BOJ’s ultra-loose monetary policy will remain in place, were seen as a factor that could potentially weigh on the yen and temper its gains.

Prime Minister Shinzo Abe’s government is to present Kuroda’s nomination to parliament later this month, a person briefed on the matter said on Saturday.

Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore, said on Monday: “It’s not as if the dollar is going to rise sharply against the yen in the next couple of days just because Kuroda is set to be re-appointed”.

“But once the market settles down, focus will probably return to differences in monetary policy... and that could give the dollar an upward bias against the yen,” he said.

For now, however, the yen is likely to take its cues from moves in U.S. and global equities, Okagawa said, adding that it may take a few weeks for markets to regain some calm.

The yen had risen last week as global equity markets tumbled and volatility soared - moves that came after U.S. bond yields jumped on heightened worries about inflation.

Given the focus on inflation, investors may be taking a wait-and-see stance ahead of data on U.S. consumer price index due on Wednesday, said Teppei Ino, an analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore.

If the U.S. CPI data for January comes in strong and triggers a renewed rise in bond yields, that could dent equities and spur demand for the yen, Ino added.

Against a basket of six major currencies, the dollar eased 0.4 percent to 90.105 after gaining 1.4 percent last week.

Last week was the greenback’s strongest against the currency basket in nearly 15 months as some traders closed out dollar-bearish bets, while others favoured the dollar in a safe-haven move to exit other higher-returning but riskier currencies.

The euro edged up 0.3 percent to $1.2290. Last week, the common currency slid 1.6 percent, its worst weekly performance since November 2016, as declining risk appetites and higher volatility prompted market players to reduce their positions.

The euro was susceptible to such position-squaring because a popular trade before the recent market upheaval had been to buy the euro on expectations of the European Central Bank unwinding monetary stimulus.

NEW YORK (Reuters) - Stock investors on Monday will be seeking to divine if the deepest weekly slide since January 2016 will continue or if the market will turn the corner after one of the most volatile five days in years.

Equal parts science, art and luck may be needed to pick a bottom in the S&P 500. While it ended last week on an up note, the index was caught in its first correction in two years, after a 7 percent rally this year that culminated with a record high on Jan. 26, following a 19 percent 2017 gain.

While Wall street experts caution that it is difficult to definitively pinpoint a turning point, several said they will monitor a number of indicators that could help show if the selloff has ended.

“People sometimes get pulled into wanting to call tops or bottoms,” said Frank Cappelleri, chief market technician at Instinet in New York. “I would say it is almost impossible to do that, especially on a continued basis, but I think identifying patterns when they develop can at least give you a sense that things are turning just a bit.”

FEWER NEW LOWS: Wall Street’s main stock indexes climbed more than 1 percent on Friday, giving investors some solace after a week of huge swings that shook the market out of months of calm.

Even with Friday’s gains, the benchmark S&P 500 fell 5.2 percent for the week, its biggest weekly percentage drop since January 2016, as volatility spiked.

“You want to see that less stocks are making new lows even if the whole market is down,” Keith Lerner, chief market strategist at Suntrust Advisory Services, said in an email.

In one positive sign on Friday, 65 percent of S&P 500 stocks made new 20-day lows, compared with 79 percent on Tuesday, Lerner said.

“What you want to see eventually is strong buying. You want to see multiple days where 90 percent of the volume is positive (stocks that are rising,)” he said.

SEARCHING OUT THE SECTORS: Cappelleri is watching for pockets of strength. “That’s step one: seeing the bleeding stop, at least for a few different areas or groups. And then from that point we can see if that broadens out a bit,” he said.

Better performance of economically sensitive sectors such as financials could be a sign that investors are becoming less bearish. “When people feel better about the market you don’t want to see utilities lead,” Lerner said.

TECH TRIPS UP: “Any final flush for U.S. equity markets has to pull this group much lower and very quickly,” said Nicholas Colas, co-founder of DataTrek Research. “One big reason we don’t think U.S. stocks have bottomed: this hasn’t happened yet.”

The S&P 500 technology index led market gains in 2017, rising 36.9 percent for the year. The technology index is down 0.28 percent so far this year, while the S&P 500 is down 2.02 percent.

VIX VISION: The market’s fear gauge, the CBOE Volatility Index, known as the VIX, has spiked in recent days and earlier last week hit its highest level since August 2015. “I’d like to see the VIX tamed and move back to the lower end of its trading range,” said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

Colas said: “It is a declining VIX (often over weeks, not days) that sets the floor for stocks, not a peaky top. So even if this week was the high water mark for the VIX in this correction, we may well see stocks slip further.”

In the months before the selloff, the VIX was trading between about 10 and 13, well below its long-term average of 20. It closed Friday at 29.06.

RELATION TO RATES: An increase in bond yields has been seen as a catalyst for the selloff, presenting investment competition to equities at a time when stock valuations are expensive. “If we see some stabilizing in interest rates and bond yields in particular, that would seem to indicate what’s going on there has settled down,” Hellwig said.

U.S. benchmark 10-year Treasury note yields early last week surged to 2.885 percent, the highest level since January 2014.

PANIC SAFE-HAVEN BUYING: Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis, is looking for “full-on panic.” There has been no sign of investors rushing into safe havens such as gold, U.S. Treasuries and the dollar.

“To find the end you need to see evidence that it truly has convinced people it’s going to go down more, or there’s panic,” Paulsen said. “And I just haven’t seen that yet, at least in behavior.”

MINDING MOMENTUM: Vincent Catalano, global macro strategist at Blue Marble Research in New York, is watching a key indicator of market momentum known as the moving average convergence divergence line, or MACD. “When the line starts to flatten out, that’s an indication that the pressure is ending, that we’ve reached the short-term bottom,” Catalano said. MACD is a momentum oscillator widely followed by chartists that is based on the relationship between moving averages.

TEST OF 200-DAY MOVING AVERAGE: In the most recent bull market’s pullback, the 200-day moving average of the S&P – currently at 2,539 - has been tested, said Brad McMillan, chief investment officer of Commonwealth Financial Network in Waltham, Massachusetts. On Friday, the S&P 500 briefly dipped below that level before rebounding. “That’s typically what we’ve seen in past market cycles. It’s stopped and bounced around at that point,” McMillan said. But if the S&P 500 were to sustain losses below that mark, he said, a “big round number,” such as 2,500, would be the next support level he would look for on the S&P.

Sunday, 11 February 2018

NEW YORK (Reuters) - The inflation bogeyman has reared its ugly head and sent U.S. stock investors racing for the hills in recent days.

Next week, coming off one of the most volatile stretches in years, two important readings on U.S. inflation could help determine whether the stock market begins to settle or if another bout of volatility is in store.

If the January’s U.S. consumer price index due next Wednesday from the U.S. Labor Department, and the producer price index the next day, come in higher than the market anticipates, brace for more selling and gyrations for stocks.

U.S. consumer prices rose 2.1 percent year-on-year in December and is forecast to stay around that pace this month.

“If we get a hot CPI print it will insert additional uncertainty, but if we get a quiet, below-consensus print, you may see yields down and equities rally,” said Jason Ware, Chief Investment Officer & Chief Economist at Albion Financial Group in Salt Lake City, Utah.

The equity market has become highly sensitive to inflation this month. A selloff in U.S. stocks earlier this week was in large part sparked by the Feb. 2 monthly U.S. employment report which showed the largest year-on-year increase in average hourly earnings since June 2009.

Recent U.S. tax cuts that may spur economic growth, the prospect of more government borrowing to fund a widening fiscal deficit, and rising wages, have all pushed up benchmark U.S. Treasury yields to near four-year highs.

“This is how we started, go back to Friday and this is exactly where we were,” said Art Hogan, chief market strategist at B. Riley FBR in New York.

“The conversation about equity risk premium, interest rates and inflation, we are coming full circle.”

The jump in wage inflation pushed yields on the benchmark 10-year U.S. Treasury note closer to the 3.0 percent mark last seen four years ago, denting the attractiveness of equities, and unnerving investors fearful inflation will force the U.S. Federal Reserve to raises short term interest rates at a faster pace than is currently priced into the market.

The current earnings yield for the S&P 500 index companies stands at 5.4 percent, below the 6.4 percent average of the past 20 years. As bond yields rise the spread between the two narrows, prompting asset allocation changes between equities and fixed income.

Investor concerns over inflation was reflected in Lipper funds data on Thursday, which showed U.S.-based inflation-protected bond funds attracted $859 million over the weekly period, the largest inflows since November 2016.

On Thursday, New York Federal Reserve President William Dudley said the central bank’s forecast of three rate hikes still seemed a “very reasonable projection” but added there was a potential for more, should the economy look stronger.

Traders are currently putting the chances of a 25 basis point hike by the Fed at its March meeting at 84.5 percent, according to Thomson Reuters data.

Benchmark 10-year note yields this week rose to a four-year high of 2.885 percent. On Friday, benchmark 10-year notes last fell 1/32 in price to yield 2.853 percent.

While many analysts were predicting bond yields to rise this year as global economies improve, the suddenness of the move was a large factor in the recent stock market selloff.

The 10-day correlation between the S&P 500 index and yields on the 10-year note was at a negative 0.79, as of late Thursday.

On Friday, both the Dow Jones Industrial Average and S&P 500 index closed out their worst two-week performance since August 2011.

“The pace really does matter,” said Ron Temple, Head of US Equities and Co-Head of Multi Asset Investing at Lazard Asset Management in New York.

“If we see 3.0 percent next week that is going to spook people more - the equity market psyche is fragile at this point.”

The fragile investor psyche is likely to lead to continued volatility coming off a week that saw the Dow suffer its largest intraday index point decline in history on Monday, nearly 1,600 points. The Dow currently has an average intraday swing over the past 50 days of 265.76 points, the highest since March 2016.

While volatility has subsided a little from the heights touched earlier this week, it is far from an all clear, Nigol Koulajian, chief executive of Quest Partners, a New York-based systematic commodity trading advisor with $1.4 billion in assets under management, said.

Koulajian pointed to the fixed income market as the main catalyst right now for near-term moves in the stock market.

“Investors need to keep a very, very close eye on fixed income,” he said. “The catalyst needn’t be big. When the market is this levered, even tiny events can trigger a big avalanche.”

But analysts also caution yields are not at levels that should be alarming to investors, and in fact are at levels that signal a healthier global economy, and the performance of some stocks this week points to a belief the consumer is also getting healthier.

The average yield on the 10-year Treasury note over the past 30 years is 4.834 percent, still well above current levels.

“Fundamentals are still positive, there is strong economic growth and strong earnings growth - those will help stocks move higher over time,” said Kate Warne, investment strategist at Edward Jones in St. Louis.